The resignation of Axel Weber as president of the Bundesbank was a very curious move given recent events at the ECB. I say curious in that he may have improved his candidacy for ECB President with the move by distancing himself from the Merkel government or he may have placed himself as an opposition candidate if the Merkel government falls.
Weber was expected to be a strong candidate for ECB President but ran into headwinds from dovish ECB governors and internal ECB politics. With tax receipts running below expected levels in Greece, a new government in Ireland, and Portugese banks in trouble the dovish members are pressuring the ECB to hold the line while the Bundesbank is pushing for a rate increase to help relieve the pressure on an overheating economy before inflation takes hold.
Weber mentioned that he felt stymied as a lone inflation hawk which is in direct contrast to numerous hawkish statements made by Trichet. Trichet has long held that interest rates may rise later this year and the emergency measures were to be placed in a different category.
Today, Weber stated that he expects 3 hikes this year as the ECB seeks to normalize rates which seems as though the ECB has become more hawkish.
Where Weber may have improved his candidacy is that by distancing himself from Merkel’s government, which is facing a backlash from the German populace regarding Germany’s role in the European bailouts, and placing himself as a hawkish outsider in the event Merkel’s government falls.
Last week’s introductory statement by the ECB included the following message: “Strong vigilance is warranted with a view to containing upside risks to price stability. Overall, the Governing Council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialise. The continued firm anchoring of inflation expectations is of the essence.”
Two points to take from this message. The first is that the hawkish statement is in direct contrast to Weber’s statements upon leaving the Bundesbank.
The second is that the phrase ‘strong vigilance’ was last used right before the ECB started raising interest rates and the final sentence referring to the anchoring of inflation expectations is cyptic to say the least.
At the start of the year it appeared as though the ECB would be looking to raise rates in the third quarter to 2011 but inflationary trends in agriculture and commodities have forced the ECB to shift their hand and stay ahead of the curve.
Later in the statement, Trichet mentions that euro area HICP inflation has risen to 2.4% in February and that in order to stem the rise in HICP and avoid its transfer to more broad based inflation, expectations must be anchored to the 2% level.
This indicates that the ECB is ready to begin raising rates from its low level in order to try and stem inflationary concerns.
If as expected, Portugal accepts a bailout in the coming weeks and the ECB is able to successfully restructure Greece’s debt it will set the stage for the ECB to begin raising the benchmark rate.
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